May 21, 2014 – TMT: “Culture Eats Strategy for Breakfast!”
TMT: “Culture Eats Strategy for Breakfast!”
Culture matters. It biases a company’s world-view, it shapes institutional skill sets, and dictates management decisions. When it is aligned with a company’s strategy and the opportunities created by the market, it is a powerful competitive force, and when it is misaligned, it is an insurmountable obstacle to success. Each of the companies that have been the biggest drivers of the sea change underway in TMT carries the imprint of its founder(s) in strong, idiosyncratic cultures that are key to understanding their likely moves and their long-term potential performance in the face of major industry shifts. GOOG, driven to extend its towering leadership of cloud data center technology and leverage it via “moon shot” bets, and AMZN, relentless in pursuing its manifest destiny of global retail and wholesale distribution dominance, are aligned for success in the huge opportunities being created in TMT. FB’s culture is admirably agile in following its founder’s lead, a trait that is probably an enormous asset, but also, possibly a risk. MSFT, in the post-Gates era, was a poster child for culture/strategy/opportunity misalignment, but the 3rd generation CEO transition appears to have the company moving back to strategies that play to its cultural strengths. Finally, AAPL’s famously Jobs-ian culture has been absolutely critical to its rise to the top, but may be becoming a liability as the market opportunity shifts off of the device and into the cloud.
Corporate culture is critical to understanding TMT. The most influential tech companies tend to be young compared to leaders in other sectors, and typically, reflect the personalities of their founders, which guide their strategies for pursuing success in their particular vision of the future, shape their institutional capabilities and assets, and set their operating philosophies. When culture is well aligned to the real dictates of the evolving marketplace, it can be a powerful force driving success, and when it is not, it is a substantial limitation. As Peter Drucker famously said, “culture eats strategy for breakfast!”
Culture has many facets. There are many frameworks for evaluating culture, most of which touch on similar themes. The McKinsey 7S approach assesses organizations on 7 dimensions. Within the 7S, Systems, Structure and Strategy are viewed as “hard elements” that are easy to specify and change, and Staff, Skills, Style and Shared Values are “soft elements” that represent the personality or culture of an organization. To the extent that both hard and soft elements are well aligned to the company’s vision, and in turn, to the realities of the evolving market opportunities, a company can be successful. Misalignment is often badly punished in competition. This is particularly true in TMT, where personalities are strong and company lives are often short.
GOOG: Using computer science to solve big problems. CEO/founder Larry Page sets the tone for the company culture that we believe is best positioned for the cloud era. GOOG’s core strategy is to push the leading edge of software and data center design as far and as fast as possible, using its technology leadership to audaciously attack huge problems in business and society, and to find the best ways to monetize and protect its business investment. Its cloud data center skills are world best with very strong web application and advertising capabilities and growing design expertise. It is the employer of choice for top computer science talent, drawn by management that values ingenuity, big thinking, and risk taking, with a famous “work hard, play hard” meritocratic style that puts it near the top of “best company to work for” lists. We view GOOG’s culture and strategy/vision as tightly aligned to the biggest opportunities of the cloud era.
AMZN: Relentless pursuit of manifest destiny. AMZN plans to overwhelm incumbent merchants in segment after segment with its scale economies, efficiencies, convenience and selection, with the goal of rolling up as much of the $30T global retail and wholesale market as possible. AMZN’s institutional skill set is impressive, with the industry best e-tail logistics operation, world-class cloud data centers, and impressive product development capabilities. CEO/founder Bezos values customers above all (while disdainful of investors), and sets the tone for the company’s secretive, combative and Spartan style. The environment for employees is considered a bit harsh, and AMZN has more difficulty attracting and retaining staff than most of its rivals. While this may be a cultural soft spot, we see AMZN’s culture well suited to its aggressive strategy and to the e-commerce opportunity.
FB: In search of ubiquity. Mark Zuckerberg’s ambition is to connect every person on earth and to collect as much information about them as possible. FB culture is aligned to that goal, and reflects his “Hacker’s Way” manifesto of “move fast and break things”. FB values agility, shifting strategies on the fly, boosting things that work and killing things that don’t, and it values data, collecting as much of it as it can. It has strong data center, analytics and application software skills, with growing facility in advertising. FB has a fast paced, swashbuckling style that appeals to engineering talent, and attracts top notch staff with ease. FB’s culture and strategy are now well matched to opportunity, but Zuckerberg’s total control, relative inexperience, and distaste for financials, leaves the risk of a costly strategic misstep.
MSFT: Getting back on track. Under Bill Gates, MSFT was a vicious competitor that kept its strategic options open until it launched its withering attack, but also helped 3rd party developers prosper within its growing sphere. Gates stepped down in 2000, on the heels of a deal with the DoJ that neutered MSFT’s most aggressive tactics, and the company entered a lost decade of strong cash flows but slipping relevance. The recent elevation of Satya Nadella to CEO portends a move to strategies better aligned to the company’s cultural strengths and the opportunities of the emerging cloud era. MSFT has world-class cloud data centers, strong applications programming skills, and deep understanding of enterprise computing needs. It is still able to acquire strong talent, and is breaking the scleral bureaucracy that has plagued it.
AAPL: What would Steve do? During the 2nd Jobs era, AAPL is one of the greatest examples of the power of cultural alignment with strategy and opportunity. AAPL was and is creative, device driven, meticulous, and secretive, with world-best integrated device design, operations and marketing skill sets. Management style stresses accountability and winning, and rewards are status and responsibility rather than money or perks. However, as the cloud paradigm rises and high-end device sales decelerate, AAPL’s device-focused strategy and aligned culture, is limiting its opportunity set. The Beats by Dre acquisition may break with Jobs’ distaste for large acquisitions, but the assets being bought – brand, design, music industry experience – are all things that merely extend AAPL’s existing strengths. We are concerned that AAPL could be entering its own “lost decade”.
For our full research notes, please visit our published research site.